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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-25544
Miravant Medical Technologies
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(Exact name of Registrant as specified in its charter)
Delaware 77-0222872
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
336 Bollay Drive, Santa Barbara, California 93117
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(Address of principal executive offices, including zip code)
(805) 685-9880
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 9, 2002
----- -----------------------------
Common Stock, $.01 par value 18,900,841
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Condensed Consolidated Financial Statements
Condensed consolidated balance sheets as of June 30, 2002 and
December 31, 2001........................................................ 3
Condensed consolidated statements of operations for the three and
six months ended June 30, 2002 and 2001................................... 4
Condensed consolidated statement of stockholders' equity (deficit)
for the six months ended June 30, 2002.................................... 5
Condensed consolidated statements of cash flows for the six
months ended June 30, 2002 and 2001....................................... 6
Notes to condensed consolidated financial statements....................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 10
PART II. OTHER INFORMATION
Item 3. Qualitative and Quantitative Disclosures About Market Risk................. 37
Item 4. Submission of Matters to a Vote of Security Holders........................ 37
Item 6. Exhibits and Reports on Form 8-K........................................... 37
Signatures................................................................. 39
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MIRAVANT MEDICAL TECHNOLOGIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
-------------------- ---------------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents............................................... $ 649,000 $ 1,458,000
Investments in short-term marketable securities......................... 3,033,000 4,654,000
Accounts receivable..................................................... -- 5,030,000
Inventories............................................................. -- 395,000
Prepaid expenses and other current assets............................... 984,000 1,024,000
-------------------- ---------------------
Total current assets....................................................... 4,666,000 12,561,000
Property, plant and equipment:
Vehicles................................................................ 28,000 28,000
Furniture and fixtures.................................................. 1,396,000 1,404,000
Equipment............................................................... 5,551,000 5,447,000
Leasehold improvements.................................................. 3,495,000 3,382,000
-------------------- ---------------------
10,470,000 10,261,000
Accumulated depreciation................................................ (9,518,000) (9,057,000)
-------------------- ---------------------
952,000 1,204,000
Investments in affiliates.................................................. 541,000 635,000
Deferred financing costs................................................... -- 913,000
Patents and other assets................................................... 909,000 852,000
-------------------- ---------------------
Total assets............................................................... $ 7,068,000 $ 16,165,000
==================== =====================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable........................................................ $ 1,943,000 $ 2,535,000
Accrued payroll and expenses............................................ 628,000 786,000
Current portion of long-term debt....................................... 5,238,000 --
-------------------- ---------------------
Total current liabilities.................................................. 7,809,000 3,321,000
Long-term liabilities:
Long-term debt, less current portion.................................... 5,554,000 26,548,000
Sublease security deposits.............................................. 94,000 94,000
-------------------- ---------------------
Total long-term liabilities................................................ 5,648,000 26,642,000
Stockholders' equity (deficit):
Common stock, 50,000,000 shares authorized; 18,877,818 and 18,876,075 shares
issued and outstanding at June 30, 2002 and December 31, 2001,
respectively.......................................................... 176,960,000 161,496,000
Notes receivable from officers.......................................... (1,000,000) (822,000)
Deferred compensation................................................... (277,000) (547,000)
Accumulated other comprehensive loss.................................... (450,000) (356,000)
Accumulated deficit..................................................... (181,622,000) (173,569,000)
-------------------- ---------------------
Total stockholders' equity (deficit)....................................... (6,389,000) (13,798,000)
-------------------- ---------------------
Total liabilities and stockholders' equity (deficit)....................... $ 7,068,000 $ 16,165,000
==================== =====================
See accompanying notes.
MIRAVANT MEDICAL TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
----------------- ----------------- ---------------- ----------------
Revenues:
License-contract research and development......... -- 122,000 20,000 204,000
Bulk active pharmaceutical ingredient sales....... -- 2,286,000 479,000 2,286,000
Royalties......................................... -- 75,000 -- 75,000
----------------- ----------------- ---------------- ----------------
Total revenues...................................... -- 2,483,000 499,000 2,565,000
Costs and expenses:
Cost of goods sold................................ -- 128,000 479,000 128,000
Research and development.......................... 2,307,000 3,248,000 5,224,000 6,133,000
Selling, general and administrative............... 1,315,000 1,410,000 2,686,000 3,074,000
----------------- ----------------- ---------------- ----------------
Total costs and expenses............................ 3,622,000 4,786,000 8,389,000 9,335,000
Loss from operations................................ (3,622,000) (2,303,000) (7,890,000) (6,770,000)
Interest and other income (expense):
Interest and other income........................ 44,000 222,000 118,000 543,000
Interest expense................................. -- (533,000) (281,000) (1,181,000)
Gain on sale of property, plant and equipment.... -- 586,000 -- 586,000
----------------- ----------------- ---------------- ----------------
Total net interest and other income (expense)....... 44,000 275,000 (163,000) (52,000)
----------------- ----------------- ---------------- ----------------
Net loss............................................ (3,578,000) (2,028,000) (8,053,000) (6,822,000)
================= ================= ================ ================
Net loss per share - basic and diluted.............. (0.19) (0.11) (0.43) (0.37)
================= ================= ================ ================
Shares used in computing net loss per share......... 18,876,652 18,587,799 18,876,564 18,583,478
================= ================= ================ ================
See accompanying notes.
MIRAVANT MEDICAL TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
Notes Accumulated
Receivable Deferred Other
Common Stock from Compensation Comprehensive Accumulated
Shares Amount Officers and Interest Loss Deficit Total
------------ -------------- ------------- --------------- -------------- -------------- -------------
Balance at December 31, 2001..18,876,075 $ 161,496,000 $ (822,000) $ (547,000) $ (356,000) $(173,569,000) $(13,798,000)
Comprehensive loss:
Net loss.................... -- -- -- -- -- (8,053,000) (8,053,000)
Net change in accumulated
other comprehensive loss.... -- -- -- -- (94,000) -- (94,000)
-------------
Total comprehensive loss..... (8,147,000)
Issuance of stock awards and
ESOP matching contribution.. 1,743 13,000 -- -- -- -- 13,000
Non-cash contributions by
Pharmacia Corporation:
Lease payments............. -- 58,000 -- -- -- -- 58,000
Debt restructuring......... -- 15,393,000 -- -- -- -- 15,393,000
Deferred compensation........ -- -- -- (8,000) -- -- (8,000)
Officer notes................ -- -- (178,000) -- -- -- (178,000)
Amortization of deferred
compensation................ -- -- -- 278,000 -- -- 278,000
------------ --------------- ------------- --------------- -------------- --------------- -------------
Balance at June 30, 2002.....18,877,818 $ 176,960,000 $ (1,000,000) $ (277,000) $ (450,000) $(181,622,000) $(6,389,000)
============ =============== ============= =============== ============== =============== =============
See accompanying notes.
MIRAVANT MEDICAL TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
Operating activities: 2002 2001
------------------- ----------------------
Net loss.......................................................... $ (8,053,000) $ (6,822,000)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization.................................. 493,000 674,000
Amortization of deferred compensation.......................... 277,000 289,000
Stock awards and ESOP matching contribution.................... 13,000 580,000
Gain on sale of property, plant and equipment.................. -- (586,000)
Non-cash interest and amortization of deferred
financing costs on long-term debt............................ 326,000 1,184,000
Changes in operating assets and liabilities:
Accounts receivable......................................... 5,030,000 (1,552,000)
Prepaid expenses, inventories and other assets.............. 390,000 (772,000)
Accounts payable and accrued payroll........................ (773,000) (241,000)
------------------- ----------------------
Net cash used in operating activities............................. (2,297,000) (7,246,000)
Investing activities:
Purchases of marketable securities ............................... (44,709,000) (3,741,000)
Proceeds from sales of marketable securities ..................... 46,330,000 15,983,000
Additions to patents.............................................. (43,000) (62,000)
Proceeds from the sale of property, plant and equipment........... 65,000 (174,000)
------------------- ----------------------
Net cash provided by investing activities......................... 1,643,000 12,006,000
Financing activities:
Proceeds from issuance of Common Stock, less issuance costs....... -- 3,000
Issuance of note to officer....................................... (155,000) (200,000)
------------------- --------------------
Net cash (used in) financing activities........................... (155,000) (197,000)
Net increase (decrease) in cash and cash equivalents.............. (809,000) 4,563,000
Cash and cash equivalents at beginning of period.................. 1,458,000 1,935,000
------------------- ----------------------
Cash and cash equivalents at end of period........................ $ 649,000 $ 6,498,000
=================== ======================
Supplemental disclosures:
Cash paid for:
State taxes..................................................... $ 3,000 $ 13,000
=================== ======================
Interest ....................................................... $ 1,000 $ --
=================== ======================
Supplemental disclosure of non-cash transactions:
See Note 4 of the notes to the condensed consolidated financial statements
for discussion of non-cash transactions occurring during the six month
period ended June 30, 2002.
See accompanying notes.
MIRAVANT MEDICAL TECHNOLOGIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The information contained herein has been prepared in accordance with Rule
10-01 of Regulation S-X. The information at June 30, 2002 and for the three
and six month periods ended June 30, 2002 and 2001, is unaudited. In the
opinion of management, the information reflects all adjustments necessary
to make the results of operations for the interim periods a fair statement
of such operations. All such adjustments are of a normal recurring nature.
Interim results are not necessarily indicative of results for a full year.
For a presentation including all disclosures required by accounting
principles generally accepted in the United States, these consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2001
included in the Miravant Medical Technologies Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of business. Through
June 30, 2002, the Company had an accumulated deficit of $181.6 million and
expects to continue to incur substantial, and possibly increasing,
operating losses for the next few years. The Company is continuing its
efforts, to the extent possible, in research and development and the
preclinical studies and clinical trials of its products. These efforts, and
obtaining requisite regulatory approval, prior to commercialization, will
require substantial expenditures. Once requisite regulatory approval has
been obtained, if at all, substantial additional financing will be required
for the manufacture, marketing and distribution of its product in order to
achieve a level of revenues adequate to support the Company's cost
structure. Executive management of the Company believes that it has
sufficient resources to fund the current required expenditures through
September 30, 2002. Executive management is currently in discussions with
one of its significant investors for some bridge loan financing to extend
the Company's cash resources through December 31, 2002. In addition,
executive management also believes it can raise additional funding to
support operations through corporate collaborations or partnerships,
licensing of SnET2 or new products and equity financings prior to September
30, 2002. However, there can be no assurance that the Company will be
successful in obtaining such financing or that financing will available on
favorable terms. If additional funding is not available when required,
management will begin implementing additional cost restructuring programs
by the further delay or reduction in scope of one or more of its research
and development programs and further adjusting, deferring or reducing
salaries of employees and by reducing operating and overhead expenditures
to conserve cash to be used in operations.
2. Comprehensive Loss
For the six months ended June 30, 2002 and 2001, comprehensive loss
amounted to approximately $8.1 million and $6.8 million, respectively. The
difference between net loss and comprehensive loss relates to the change in
the unrealized loss or gain the Company recorded for its available-for-sale
securities on its investment in its affiliate Xillix Technologies Corp.
3. Per Share Data
Basic loss per common share is computed by dividing the net loss by the
weighted average shares outstanding during the period. Diluted earnings per
share reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted to common
stock. Since the effect of the assumed exercise of common stock options and
other convertible securities was anti-dilutive, basic and diluted loss per
share as presented on the condensed consolidated statements of operations
are the same.
4. Contract Modification and Termination Agreement with Pharmacia
On March 5, 2002, Miravant and Pharmacia entered into a Contract
Modification and Termination Agreement pursuant to which the Company
regained all of the rights and related data and assets to our lead drug
candidate, SnET2, and restructured its outstanding debt to Pharmacia.
Under the terms of the Contract Modification and Termination Agreement,
various agreements and side letters between Miravant and Pharmacia have
been terminated. Most of these agreements related to SnET2 license
agreements and related drug and device supply agreements, side letters, the
Manufacturing Facility Asset Purchase Agreement and various supporting
agreements.
The termination of the various agreements provided that all ownership of
the rights, data and assets related to SnET2 and the Phase III AMD clinical
trials will revert back to the Company. The rights transferred back to the
Company include the ophthalmology Investigational New Drug application, or
IND, and the related filings, data and reports and the ability to license
the rights to SnET2. The assets which the Company received ownership rights
to include the lasers utilized in the Phase III AMD clinical trials, the
bulk API manufacturing equipment, all of the bulk API inventory sold to
Pharmacia in 2001 and 2002 and the finished dose formulation, or FDF,
inventory. In addition to receiving back all of the bulk API inventory sold
to Pharmacia in 2001, the Company also received a payment of $479,000 for
the costs of the in-process and finished bulk API inventory manufactured
through January 23, 2002. The Company also reassumed the lease obligations
and related property taxes for its bulk API manufacturing facility. The
lease agreement expires in October 2006 and currently has a base rent of
approximately $26,000 per month.
As a condition of the Contract Modification and Termination Agreement,
Pharmacia has released to the Company $880,000, which included accrued
interest, held in an equipment escrow account, which was originally
scheduled for release in June 2002. These funds represent the $863,000
purchase price that Pharmacia paid under the Manufacturing Facility Asset
Purchase Agreement for the purchase of the Company's bulk API manufacturing
equipment in May 2001 plus interest earned through the release date.
The Contract Modification and Termination Agreement also modifies the 2001
Credit Agreement. The outstanding debt that the Company owed to Pharmacia
of approximately $26.8 million has been reduced to $10.0 million plus
accrued interest. The Company will be required to make a payment of $5.0
million plus accrued interest on each of March 4, 2003 and June 4, 2004.
Interest on the debt will be recorded at the prime rate, which was 4.75% at
March 5, 2002. Additionally, the early repayment provisions and many of the
covenants were eliminated or modified. In exchange for these changes and
the rights to SnET2, the Company terminated its right to receive a $3.2
million loan that was available under the 2001 Credit Agreement. Also, as
Pharmacia has determined that they will not file an NDA for the SnET2
PhotoPoint PDT for AMD and the Phase III clinical trial data did not meet
certain clinical statistical standards, as defined by the clinical trial
protocols, the Company will not have available an additional $10.0 million
of borrowings as provided for under the 2001 Credit Agreement.
In accordance with Statement of Financial Standards No. 15, or SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings", the
Company permanently reduced the debt due to Pharmacia to the total future
cash payments of the debt, including amounts designated as interest and
principal. The total future cash payments, at the current interest rate,
are estimated to be $10.8 million. The difference between the total debt
outstanding of $25.9 million (net of the unamortized debt issuance costs of
$851,000) and the total future cash payments of the restructured debt of
$10.8 million was recorded as an increase to stockholders' equity due to
Pharmacia being a greater than 10% stockholder in the Company, as of March
5, 2002. Additionally, the net book value of the API manufacturing
equipment received from Pharmacia, approximately $274,000, was recorded as
an increase to property, plant and equipment and stockholders' equity.
Therefore, the Company recorded a total increase to stockholders' equity in
the first quarter of 2002 of $15.4 million.
The Contract Modification and Termination Agreement also provided for the
transfer of ownership of several assets back to the Company, including the
lasers utilized in the Phase III AMD clinical trials, the bulk API and FDF
inventories and the bulk API manufacturing equipment used to manufacture
SnET2. As discussed above the Company recorded the transfer of ownership of
the API manufacturing equipment at its net carrying value prior to the sale
to Pharmacia, which was $274,000. Under generally accepted accounting
principles, there was no value recorded on the balance sheet for the
transfer of ownership of the lasers, the bulk API and FDF inventory, since
these assets, according to the Company's accounting policies, had been
expensed as research and development costs in prior years.
5. Nasdaq Delisting Notification
The Company was originally provided with a Nasdaq Staff Determination
notice in March 2002 that informed the Company that it did not meet the
market value of publicly held shares requirement (minimum common stock
market capitalization of $50,000,000) for continued listing on the Nasdaq
National Market as set forth in Marketplace Rule 4450(b)(1)(A). The Company
was also told that it did not comply with the minimum bid price for
continued inclusion requirement set forth in Marketplace Rule 4450(b)(4).
These listing requirements include maintaining stockholders' equity of
$10.0 million or net tangible assets of $4.0 million, and a $1.00 minimum
bid price; or alternatively, a common stock market capitalization of at
least $50.0 million and a minimum bid price of $3.00. In addition, the
Company also did not meet the requirements of the Nasdaq Small Cap Market,
which requires at least a $35.0 million common stock market capitalization,
with a $1.00 minimum bid price. At the conclusion of the extension period
granted to the Company by Nasdaq, the Company was unsuccessful in meeting
the continued listing requirements for both the Nasdaq National Market and
the Nasdaq Small Cap Market, as such the Company's securities were delisted
from the Nasdaq National Market on July 11, 2002. The Company was notified
on July 12, 2002 that its Common Stock would begin trading on the
over-the-counter bulletin board, or OTCBB, effective as of the opening of
business on July 12, 2002.
6. New Accounting Pronouncements: SFAS No. 144 Adoption
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" or
SFAS No. 144. SFAS No. 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets and discontinued
operations. SFAS No. 144 is effective for all fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 144 in January 2002 and the
adoption has not had a material effect on the Company's consolidated
financial statements.
7. Reclassifications
Certain reclassifications have been made to the 2001 consolidated financial
statements to conform to the current period presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section of our quarterly report on Form 10-Q contains forward-looking
statements, which involve known and unknown risks and uncertainties. These
statements relate to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "may," "will,"
"should," "potential," "expects," "anticipates," "intends," "plans," "believes"
and similar expressions. These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties and include statements regarding our ability to fund our
operations through September 2002, or through December 31, 2002 in a reduced
capacity; our ability to raise funding through collaborations, licensing
arrangements, financing transactions or obtaining a line of credit from certain
of our current private investors, the timing of the completion of our analysis
of the clinical data from the SnET2 Phase III wet age-related macular
degeneration, or AMD, clinical trials; the expected completion of our ongoing
dermatology clinical trials; our cardiovascular program strategies; and our
expected general and administrative expenditures. Our actual results could
differ materially from those discussed in these statements due to a number of
risks and uncertainties including: our actual expenditures exceeding our
projections; other parties may decline to collaborate with us due to our
financial condition or other reasons beyond our control; we may be unable to
locate parties willing to invest in our securities; unanticipated complexity or
difficulty in analyzing clinical trial data; we may be unable to obtain the
necessary funding to further our research and development activities or our
ongoing programs may encounter difficulties or fail to meet objectives; and our
general and administrative costs may not remain level due to expenses associated
with financing and partnering activities or other matters. For a more complete
description of the risks that may impact our business, see "Risk Factors", for a
discussion of certain risks, including those relating to our ability to obtain
additional funding, our ability to establish new strategic collaborations, our
operating losses, risks related to our industry and other forward-looking
statements.
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto.
General
Since our inception, we have been principally engaged in the research and
development of drugs and medical device products for use in PhotoPoint(TM) PDT,
our proprietary technologies for photodynamic therapy. We have been unprofitable
since our founding and have incurred a cumulative net loss of approximately
$181.6 million as of June 30, 2002. As we currently do not have any significant
sources of revenues, we expect to continue to incur substantial, and possibly
increasing, operating losses for the next few years due to continued spending on
research and development programs, the funding of preclinical studies, clinical
trials and regulatory activities and administrative activities. We also expect
these operating losses to fluctuate due to our ability to fund the research and
development programs as well as the operating expenses of the Company. We
believe that we have sufficient resources to fund the current required
expenditures through September 30, 2002. Executive management is currently in
discussions with one of our significant investors for some bridge loan financing
to extend our cash resources through December 31, 2002. In addition, executive
management also believes we can raise additional funding to support operations
through corporate collaborations or partnerships, licensing of SnET2 or new
products and equity financings prior to September 30, 2002. However, there can
be no assurance that we will be successful in obtaining such financing or that
financing will available on favorable terms. If additional funding is not
available when required, management will begin implementing additional cost
restructuring programs by the further delay or reduction in scope of one or more
of its research and development programs and further adjusting, deferring or
reducing salaries of employees and by reducing operating and overhead
expenditures to conserve cash to be used in operations.
Our historical revenues primarily reflect income earned from licensing
agreements, grants awarded, royalties from device product sales, milestone
payments, non-commercial drug sales to Pharmacia and interest income. During
2001 and through January 2002, we sold approximately $4.8 million of the SnET2
bulk active pharmaceutical ingredient, or bulk API, to Pharmacia to be used in
preclinical studies and clinical trials and in anticipation of a potential New
Drug Application, or NDA, filing for SnET2 for the treatment of wet age-related
macular degeneration, or AMD. The January 2002 sales of bulk API was the final
amount sold to Pharmacia.
Any other future potential new revenues such as license income from new
collaborative agreements, revenues from contracted services, grants awarded
and/or royalties from potential drug and device sales, if any, will depend on,
among other factors, the results from our ongoing preclinical studies and
clinical trials, including those of the completed Phase III AMD clinical trials,
the timing and outcome of applications for regulatory approvals, our ability to
re-license SnET2 and establish new collaborative partnerships and their
subsequent level of participation in our preclinical studies and clinical
trials, our ability to have any of our potential drug and related device
products successfully manufactured, marketed and distributed, the restructuring
or establishment of collaborative arrangements for the development,
manufacturing, marketing and distribution of some of our future products. We
anticipate our operating activities will result in substantial, and possibly
increasing, operating losses for the next several years.
In collaboration with Pharmacia, in December 2001, we completed two Phase
III ophthalmology clinical trials for the treatment of AMD with our lead drug
candidate, SnET2. In January 2002, Pharmacia, after an analysis of the Phase III
AMD clinical data, determined that the clinical data results indicated that
SnET2 did not meet the primary efficacy endpoint in the study population, as
defined by the clinical trial protocol, and that they would not be filing an NDA
with the U.S. Food and Drug Administration, or FDA. Based on Pharmacia's
analysis of the AMD clinical data, we may not be able to proceed with our plans
to seek regulatory approval of SnET2 as formerly planned. In March 2002, we
regained the license rights to SnET2 as well as the related data and assets from
the Phase III AMD clinical trials from Pharmacia. In addition, we have
terminated our license collaboration with Pharmacia, and we intend to seek a new
collaborative partner for PhotoPoint PDT in ophthalmology. We are currently
conducting our own detailed analysis of the clinical data, including an analysis
of the subset groups and, based on the results of our analysis, we will
determine the future potential development of SnET2, including the potential use
of SnET2 in other disease indications.
In June 2002, we entered into a non-binding letter of intent with Bausch &
Lomb for SnET2 for the treatment of AMD. We will jointly review the SnET2 Phase
III AMD clinical data package, and Bausch & Lomb will have the option to
negotiate the exclusive worldwide license to develop and commercialize the drug
in ophthalmology. Prior to signing the letter of intent, Bausch & Lomb reviewed
top line and certain subset analyses of the Phase III AMD clinical data. The
license option, if exercised, is subject to further negotiations, which may
include license fees, milestone payments, royalties and research, development
and commercialization expenses. Bausch & Lomb's review of the detail clinical
data is currently ongoing and we expect the conclusion of this review, and a
determination on their license option decision by September 2002. There are no
guarantees that Bausch & Lomb will enter into a license agreement for SnET2 or
provide us with the funding needed to continue operations and advance our AMD
program or other disease program pipeline.
We were notified by Nasdaq on July 11, 2002 that our Common Stock would be
delisted and begin trading on the over-the-counter bulletin board, or OTCBB,
effective as of the opening of business on July 12, 2002. The OTCBB is a
regulated quotation service that displays real-time quotes, last-sale prices and
volume information in OTC equity securities. OTCBB securities are traded by a
community of market makers that enter quotes and trade reports. Our Common Stock
will trade under the ticker symbol MRVT and can be viewed at www.otcbb.com. Our
executive management intends to make every effort to regain our listing status
on the Nasdaq National Market, however, there is no guarantee we will be able to
raise the additional capital needed or to increase the current trading price of
our Common Stock to allow us to meet the relisting requirements for the Nasdaq
National Market on a timely basis, if at all.
In ophthalmology, besides the possible use of SnET2 alone or in combination
with other therapies, we are continuing to evaluate next generation drug
compounds for use in various eye diseases.
In our dermatology program, we use a topical gel formulation to deliver
MV9411, a proprietary photoreactive drug, directly to the skin. In July 2001, we
completed a Phase I dermatology clinical trial and, in January 2002, we
commenced a Phase II clinical trial with MV9411 for potential use in the
treatment of plaque psoriasis, a chronic dermatological condition for which
there is no known cure. Plaque psoriasis is a disease marked by
hyperproliferation of the epidermis, resulting in inflamed and scaly skin
plaques. The Phase II clinical trial is currently ongoing and we expect to
complete the clinical trial by the end of 2002.
We are also conducting preclinical studies of SnET2 and existing and new
photoselective drugs for cardiovascular diseases, in particular for the
prevention and treatment of vulnerable plaque and restenosis. Vulnerable plaque
is unstable and rupture-prone inflamation within the artery walls and restenosis
is the renarrowing of an artery that commonly occurs after balloon angioplasty
for obstructive artery disease. We are in the process of formulating a new lead
drug, MV0633, and, pending the outcome of our preclinical studies with SnET2 and
some existing photoselective drugs, we may need to perform additional studies to
prepare for an Investigational New Drug application, or IND, in cardiovascular
disease for MV0633 or one of the existing photoselective drugs.
In oncology, we are conducting preclinical research of our photoselective
therapy to destroy abnormal blood vessels in tumors. We are pursuing this tumor
research with some of our new photoselective drugs and also investigating
combination therapies with PhotoPoint PDT and other types of compounds.
Based on our ability to successfully obtain additional funding, our ability
to obtain new collaborative partners, our ability to license and pursue further
development of SnET2 for AMD or other disease indications, our ability to reduce
operating costs as needed, our ability to regain our listing status on Nasdaq
and various other economic and development factors, such as the cost of the
programs, reimbursement and the available alternative therapies, we may or may
not be able to or elect to further develop PhotoPoint PDT procedures in
ophthalmology, cardiovascular disease, dermatology, oncology or in any other
indications.
Pharmacia Corporation
Over time we have entered into a number of agreements with Pharmacia to
fund our operations and develop and market SnET2. In March 2002, we entered into
a Contract Modification and Termination Agreement with Pharmacia under which we
regained all of the rights and related data and assets to our lead drug
candidate, SnET2, and we restructured our outstanding debt to Pharmacia. Under
the terms of the Contract Modification and Termination Agreement, various
agreements and side letters between Miravant and Pharmacia have been terminated,
most of which related to SnET2 license agreements and related drug and device
supply agreements, side letters, the Manufacturing Facility Asset Purchase
Agreement and various supporting agreements. We also modified our 2001 Credit
Agreement with Pharmacia.
The termination of the various agreements provided that all ownership of
the rights, related data and assets to SnET2 and the Phase III AMD clinical
trials for the treatment of AMD will revert back to us. The rights transferred
back to us include the ophthalmology IND and the related filings, data and
reports and the ability to license the rights to SnET2. The assets include the
lasers utilized in the Phase III AMD clinical trials, the bulk API manufacturing
equipment, all of the bulk API inventory sold to Pharmacia in 2001 and 2002 and
the finished dose formulation, or FDF, inventory. In addition, we reassumed the
lease obligations and related property taxes for our bulk API manufacturing
facility. The lease agreement expires in October 2006 and currently has a base
rent of approximately $26,000 per month.
Under the Manufacturing Facility Asset Purchase Agreement, which was
entered into in May 2001 and subsequently terminated in March 2002, Pharmacia
satisfied the following obligations:
* Pharmacia agreed to buy our existing bulk API inventory at cost for
$2.2 million. During 2001, the entire $2.2 million of the existing
bulk API inventory had been delivered to Pharmacia, recorded as
revenue and the payment had been received into the inventory escrow
account;
* Pharmacia committed, through two other purchase orders, to buy up to
an additional $2.8 million of the bulk API which would be manufactured
by us. As of June 30, 2002, we had sold $2.5 million of newly
manufactured bulk API inventory, which had been delivered to
Pharmacia, recorded as revenue and the payment had been received into
the inventory escrow account. No further bulk API will be sold to
Pharmacia;
* Pharmacia agreed to purchase the manufacturing equipment necessary to
produce bulk API. The manufacturing equipment was purchased for
$863,000, its fair market value as appraised by an independent
appraisal firm. The payment for the purchase of the equipment was made
into an equipment escrow account;
* The interest earned by the inventory and equipment escrow accounts
accrued to us and was released in full from each escrow account in
January 2002 and March 2002, respectively. All amounts received into
escrow were recorded as accounts receivable until the amounts were
released.
The Contract Modification and Termination Agreement also modified the 2001
Credit Agreement as follows:
* The outstanding debt that we owed to Pharmacia of approximately $26.8
million, was reduced to $10.0 million plus accrued interest;
* We will be required to make a payment of $5.0 million plus accrued
interest on each of March 4, 2003 and June 4, 2004. Interest on the
debt will be recorded at the prime rate, which was 4.75% at June 30,
2002;
* In exchange for these changes and the rights to SnET2, we terminated
our right to receive a $3.2 million loan that was available under the
2001 Credit Agreement. Also, as Pharmacia has determined that they
will not file an NDA for the SnET2 PhotoPoint PDT for AMD and the data
from the Phase III AMD clinical trials data did not meet certain
clinical statistical standards as defined by the clinical trial
protocol, we will not have available to us an additional $10.0 million
of borrowings as provided for under the 2001 Credit Agreement.
Pharmacia has no obligation to make any further milestone payments,
equity investments or to extend us additional credit;
* The early repayment provisions and many of the covenants were
eliminated or modified. Our requirement to allocate one-half of the
net proceeds from any public or private equity financings and/or asset
dispositions towards the early repayment of our debt to Pharmacia was
modified as follows:
* If our aggregate net equity financing and/or assets disposition
proceeds are less than or equal to $7.0 million, we are not required
to make an early repayment towards our Pharmacia debt;
* If our aggregate net equity financing and/or assets disposition
proceeds are greater than $7.0 million but less than or equal to $15.0
million, then we are required to apply one-third of the net proceeds
from the amount in excess of $7.0 million up to $15.0 million, or a
maximum repayment of $2.7 million towards our Pharmacia debt;
* If our aggregate net equity financing and/or assets disposition
proceeds are greater than $15.0 million but less than or equal to
$25.0 million, then we are required to apply one-half of the net
proceeds from the amount in excess of $15.0 million up to $25.0
million, or a maximum repayment of $7.7 million towards our Pharmacia
debt;
* If our aggregate net equity financing and/or assets disposition
proceeds are greater than $25.0 million, then we are required to apply
all of the net proceeds from the amount in excess of $25.0 million, or
repay the entire $10.0 million plus accrued interest towards our
Pharmacia debt; and
* Any early repayment of our Pharmacia debt applies first to the loan
amount due on March 4, 2003, then to the remaining loan amount due on
June 4, 2004.
Aside from the changes made under the Contract Modification and Termination
Agreement discussed above, there were no changes made to the Warrant Agreement,
the Equity Investment Agreement and the Registration Rights Agreement with
Pharmacia.
Results of Operations
Revenues. For the three months ended June 30, 2002, we had no revenues
compared to $2.5 million for the three months ended June 30, 2001. For the six
months ended June 30, 2002, our revenues decreased to $499,000 from $2.6 million
for the same period in 2001. The fluctuations in revenues are due to the
following:
Bulk Active Pharmaceutical Ingredient Sales. In May 2001, we entered into
an Asset Purchase Agreement with Pharmacia whereby they agreed to buy bulk API
inventory through March 2002. We recorded revenue related to bulk API sales of
$2.3 million for the three and six month periods ended June 30, 2001 and
$479,000 in January 2002. No further bulk API was sold to Pharmacia after
January 2002, as such there were no bulk API revenues for the three months ended
June 30, 2002.
License Income. License income, which represents reimbursements of
out-of-pocket or direct costs incurred in preclinical studies and Phase III AMD
clinical trials, decreased from $204,000 for the six months ended June 30, 2001
to $20,000 for the six months ended June 30, 2002. There was no license income
for the three month period ended June 30, 2002 compared to $122,000 of license
income for the three months ended June 30, 2001. The decrease in license income
is specifically related to the conclusion of the Phase III AMD clinical trials
in December 2001 and the completion of the preclinical studies and our AMD
clinical trial responsibilities. Reimbursements received during 2001 and 2002
were primarily for costs incurred to complete preclinical studies and clinical
trial oversight for AMD.
In January 2002, Pharmacia, after an analysis of the Phase III AMD clinical
data, determined that the clinical data results indicated that SnET2 did not
meet the primary efficacy endpoint in the study population, as defined by the
clinical trial protocol, and that they would not be filing an NDA with the FDA.
Subsequently, in March 2002, we entered into a Contract Modification and
Termination Agreement with Pharmacia whereby Pharmacia has agreed to reimburse
us for all of our finished and in-process lots of bulk API for approximately
$479,000. We will receive no further reimbursements from Pharmacia related to
any of our ongoing preclinical studies and clinical trials and Pharmacia will
not make any more purchases of bulk API.
Cost of Goods Sold. In connection with the newly manufactured bulk API sold
under the terms of the Asset Purchase Agreement with Pharmacia, we recorded
$479,000 in manufacturing costs for the six months ended June 30, 2002 compared
to $128,000 for the same period in 2001. There were no manufacturing costs for
the three month period ended June 30, 2002 compared to $128,000 for the same
period in 2001. The amounts recorded as cost of goods sold in 2002 represent the
costs incurred for only the newly manufactured bulk API in 2002. The amounts
recorded for cost of goods sold in 2001 represent the costs for the final
preparation of existing bulk API that had been manufactured in 1999 and 2000 and
recorded as research and development expenses in those periods. No further cost
of goods sold are expected, as Pharmacia will not be making any further
purchases of bulk API.
Research and Development. Research and development expenses are expensed as
incurred. Research and development expenses are comprised of direct and indirect
costs. Direct costs consist of preclinical studies, clinical trial and related
clinical drug and device development and manufacturing costs, drug formulation
expenses, contract services and other research and development expenditures.
Indirect costs consist of salaries and benefits, overhead and facility costs,
and other support service expenses. Our research and development expenses
decreased to $5.2 million for the six months ended June 30, 2002 compared to
$6.1 million for the same period in 2001. For the three months ended June 30,
2002, our research and development expenses decreased to $2.3 million compared
to $3.2 million for the same period in 2001. The overall decrease in research
and development expenses is specifically related to the conclusion of the Phase
III AMD clinical trials in December 2001 and the completion of the preclinical
studies and our AMD clinical trial responsibilities. Our research and
development expenses, net of license reimbursement and grant revenue, were $5.2
million for the six months ended June 30, 2002 and $5.9 million for the same
period in 2001. Our research and development expenses, net of license
reimbursement and grant revenue, were $2.3 million for the three months ended
June 30, 2002 and $3.1 million for the same period in 2001. Research and
development expenses for the three and six months ended June 30, 2001 and 2002
related primarily to payroll, payroll taxes, employee benefits and allocated
operating costs. Additionally, the Company incurred research and development
expenses for:
* Development work associated with the development of new devices,
delivery systems, drug compounds and formulations for the dermatology
and cardiovascular programs;
* Preclinical studies and clinical trial costs for our Phase I and Phase
II dermatology program; and
* Costs incurred to complete preclinical studies for the Phase III AMD
program in 2001 and to review the Phase III AMD clinical data in 2002.
As previously mentioned, we have four research and development programs for
which we have focused our research and development efforts: ophthalmology,
dermatology, cardiovascular disease and oncology. Research and development costs
are initially identified as direct costs and indirect costs, with only direct
costs tracked by specific program. These direct costs consist of clinical,
preclinical, drug and formulation development, device development and research
costs. We do not track our indirect research and development costs by program.
These indirect costs consist of labor, overhead and other indirect costs. The
specific program research and development costs represent the direct costs
incurred. The direct research and development costs by program are as follows:
Three months ended June 30, Six months ended June 30,
-------------------------------- -------------------------------------- ------------------------------------
Program 2002 2001 2002 2001
-------------------------------- ---------------- ------------------ --------------- ----------------
Direct costs:
Ophthalmology.............. $ 71,000 $ 196,000 $ 71,000 $ 316,000
Dermatology................ 200,000 264,000 258,000 347,000
Cardiovascular disease..... 47,000 302,000 220,000 459,000
Oncology................... 1,000 56,000 21,000 96,000
---------------- ------------------ --------------- ----------------
Total direct costs.............. $ 319,000 $ 818,000 $ 570,000 $ 1,218,000
Indirect costs ................. $ 1,988,000 $ 2,430,000 $ 4,654,000 $ 4,915,000
---------------- ------------------ --------------- ----------------
Total research and development
costs........................... $2,307,000 $ 3,248,000 $ 5,224,000 $ 6,133,000
================ ================== =============== ================
Ophthalmology. Our direct ophthalmology program costs have decreased from
$316,000 for the six months ended June 30, 2001 to $71,000 for the same period
in 2002. For the three months ended June 30, 2002 our direct ophthalmology
program costs have decreased to $71,000 compared to $196,000 for the same period
in 2001. Costs incurred in the ophthalmology program have consisted of clinical
trial expenses for the screening, treatment and monitoring of individuals
participating in the AMD clinical trials, internal and external preclinical
study costs, and drug and device development and manufacturing costs. The
decrease for both the three and six month periods ended June 30, 2002 is
specifically related to the conclusion of the Phase III AMD clinical trials in
December 2001 and the completion of the SnET2 preclinical studies and our AMD
clinical trial responsibilities.
Dermatology. Our direct dermatology program costs decreased from $347,000
for the six months ended June 30, 2001 to $258,000 for the same period in 2002.
For the three months ended June 30, 2002 our direct dermatology program costs
have decreased to $200,000 compared to $264,000 for the same period in 2001.
Costs incurred in the dermatology program include expenses for drug development
and drug formulation, internal and external preclinical study costs, and Phase I
and Phase II clinical trial expenses. The decrease for the six months ended June
30, 2002 as compared to 2001 is due to 2002 incurring only the cost of the Phase
II clinical trial, while 2001 consisted primarily of the cost for the Phase I
clinical trial as well as expenditures related to device and drug formulation
development and manufacturing and preclinical studies.
Cardiovascular Disease. Our direct cardiovascular disease program costs
decreased from $459,000 for the six months ended June 30, 2001 to $220,000 for
same period in 2002. For the three months ended June 30, 2002 our direct
cardiovascular disease program costs have decreased to $47,000 compared to
$302,000 for the same period in 2001. Our cardiovascular disease program costs
include expenses for the development of new drug compounds and light delivery
devices, drug formulation costs, drug and device manufacturing expense and
internal and external preclinical study costs. The decrease from 2001 to 2002 is
related to the progress of the program, which has required less preclinical
studies, as well as, a decrease in development and manufacturing activities for
drug and devices used in the preclinical studies.
Oncology. Our direct oncology program costs have decreased from $96,000 for
the six months ended June 30, 2001 to $21,000 for the same period in 2002. For
the three months ended June 30, 2002, our direct oncology program costs have
decreased to $1,000 compared to $56,000 for the same period in 2001. Our
oncology program costs have primarily consisted of costs for internal and
external preclinical study costs and expenses for the early development of new
drug compounds. The decrease in oncology program costs from 2001 to 2002 is
related to our decision to focus on more discovery and research programs for use
of PhotoPoint PDT in oncology.
Indirect Costs. Our indirect costs have decreased from $4.9 million for the
six months ended June 30, 2001 to $4.7 million for the same period in 2002. For
the three months ended June 30, 2002 our indirect costs have decreased to $2.0
million compared to $2.4 million for the same period in 2001. Generally, the
decrease from 2001 to 2002 was attributed to a reduction in our responsibilities
in the AMD program, as well as a continued reduction in labor costs due to
employee attrition. The decrease was also related to the sublease of one of our
buildings, which reduced facility and overhead costs.
We expect future research and development expenses may fluctuate depending
on available funds, continued expenses incurred in our preclinical studies and
clinical trials in our ophthalmology, dermatology, cardiovascular, oncology and
other programs, costs associated with the purchase of raw materials and supplies
for the production of devices and drug for use in preclinical studies and
clinical trials, results obtained from our ongoing preclinical studies and
clinical trials and the expansion of our research and development programs,
which includes the increased hiring of personnel, the continued expansion of
existing or the commencement of new preclinical studies and clinical trials and
the development of new drug compounds and formulations.
Selling, General and Administrative. Our selling, general and
administrative expenses for the six months ended June 30, 2002 decreased to $2.7
million from $3.1 million for the three months ended June 30, 2001. For the
three months ended June 30, 2002 our selling, general and administrative
expenses decreased slightly to $1.3 million compared to $1.4 million for the
same period in 2001. Selling, general and administrative expenses for the three
and six month periods ended June 30, 2001 and 2002 related primarily to payroll,
payroll taxes, employee benefits and operating costs such as rent and utilities.
These expenses have decreased from 2001 to 2002 as a result of a decrease in the
number of administrative employees as well as a temporary reduction in wages
taken by all employees during the first quarter of 2002.
We expect future selling, general and administrative expenses to remain
consistent with prior periods although they may fluctuate depending on available
funds, and the support required for research and development activities, the
costs associated with potential financing and partnering activities, continuing
corporate development and professional services, compensation expense associated
with stock options and warrants granted to consultants and expenses for general
corporate matters.
Interest and Other Income. Interest and other income decreased to $118,000
for the six months ended June 30, 2002 from $543,000 for the six months ended
June 30, 2001. For the three months ended June 30, 2002 interest and other
income decreased to $44,000 from $222,000 for the same period in 2001. The
fluctuations in interest and other income are directly related to the levels of
cash and marketable securities earning interest and the rates of interest being
earned. The level of future interest and other income will primarily be subject
to the level of cash balances we maintain from period to period and the interest
rates earned.
Interest Expense. Interest expense decreased from $281,000 for the six
months ended June 30, 2002 from $1.2 million for the same period in 2001. For
the three months ended June 30, 2002 interest expense decreased to zero from
$533,000 for the same period in 2001. The decrease for both the three and six
month periods was primarily related to the restructuring of the Pharmacia loans
in March 2002, which provided for interest for only two months in 2002. In
accordance with the Statement of Financial Accounting Standards No. 15, or SFAS
No. 15, with the restructuring of the Pharmacia debt in March 2002, we reduced
our outstanding debt to the total future cash payments of the debt, which
included $792,000 designated as interest and $10.0 million as principal. Also,
with the restructuring of the debt, the value of the warrants issued to
Pharmacia was reduced to zero. Therefore, unless there is an increase in the
prime rate used of 4.75%, no further interest expense will be recorded for the
Pharmacia loans. The level of other interest expense in future periods is not
currently expected to be material.
Liquidity and Capital Resources
Since inception through June 30, 2002, we have accumulated a deficit of
approximately $181.6 million and expect to continue to incur substantial, and
possibly increasing, operating losses for the next few years. We have financed
our operations primarily through private placements of Common Stock and
Preferred Stock, private placements of convertible notes and short-term notes,
our initial public offering, a secondary public offering, Pharmacia's purchases
of Common Stock and credit arrangements. As of June 30, 2002, we have received
proceeds from the sale of equity securities, convertible notes and credit
arrangements of approximately $223.0 million. We do not anticipate achieving
profitability in the next few years, as such we expect to continue to rely on
external sources of financing to meet our cash needs for the foreseeable future.
As of June 30, 2002, our consolidated financial statements have been prepared
assuming we will continue as a going concern.
In March 2002, Miravant and Pharmacia entered into a Contract Modification
and Termination Agreement pursuant to which we regained all of the rights and
related data and assets to our lead drug candidate, SnET2, and restructured our
outstanding debt to Pharmacia.
Under the terms of the Contract Modification and Termination Agreement,
various agreements and side letters between Miravant and Pharmacia have been
terminated. Most of these agreements related to SnET2 license agreements and
related drug and device supply agreements, side letters, the Manufacturing
Facility Asset Purchase Agreement and various supporting agreements.
The termination of the various agreements provided that all ownership of
the rights, data and assets related to SnET2 and the Phase III AMD clinical
trials will revert back to us. The rights transferred back to us include the
ophthalmology IND and the related filings, data and reports and the ability to
license the rights to SnET2. The assets which we received ownership rights to
include the lasers utilized in the Phase III AMD clinical trials, the bulk API
manufacturing equipment, all of the bulk API inventory sold to Pharmacia in 2001
and 2002 and the final drug formulation, or FDF, inventory. In addition to
receiving back all of the bulk API inventory sold to Pharmacia in 2001, we also
received a payment of approximately $479,000 for the costs of the in-process and
finished bulk API inventory manufactured through January 23, 2002. We reassumed
the lease obligations and related property taxes for our bulk API manufacturing
facility effective March 2002. The lease agreement expires in October 2006 and
currently has a base rent of approximately $26,000 per month.
As a condition of the Contract Modification and Termination Agreement,
Pharmacia has released to us in March 2002 the $880,000, which included accrued
interest, held in an equipment escrow account, which was originally scheduled
for release in June 2002. These funds represent the $863,000 purchase price that
Pharmacia paid under the Manufacturing Facility Asset Purchase Agreement for the
purchase of our bulk API manufacturing equipment in May 2001 plus interest
earned through the release date.
The Contract Modification and Termination Agreement also modified the 2001
Credit Agreement. The outstanding debt that we owed to Pharmacia of
approximately $26.8 million has been reduced to $10.0 million plus accrued
interest. We will be required to make a payment of $5.0 million plus accrued
interest on each of March 4, 2003 and June 4, 2004. Interest on the debt will be
recorded at the prime rate, which was 4.75% at March 5, 2002 and June 30, 2002.
Additionally, the early repayment provisions and many of the covenants were
eliminated or modified. In exchange for these changes and the rights to SnET2,
we terminated our right to receive a $3.2 million loan that was available under
the 2001 Credit Agreement. Also, as Pharmacia has determined that they will not
file an NDA for the SnET2 PhotoPoint PDT for AMD and the Phase III clinical
trial data did not meet certain clinical statistical standards, as defined by
the clinical trial protocols, we will not have available an additional $10.0
million of borrowings as provided for under the 2001 Credit Agreement.
In connection with the borrowings received under 2001 Credit Agreement, we
have issued warrants to purchase 360,000 shares of Common Stock at an exercise
price of $11.87 per warrant share for 120,000 shares, $14.83 per warrant share
for 120,000 shares and $20.62 per warrant share for 120,000 shares. The warrants
to purchase 360,000 shares of Common Stock are callable by us if the average
closing prices of the Common Stock for 30 trading days, preceding such request,
exceeds the related warrant exercise price.
Statement of Cash Flows
Net cash required for operations for the six months ended June 30, 2002 and
2001 was $2.3 million and $7.2 million, respectively. The net cash required for
operations in 2002 is primarily related to the release of the $5.1 million
contained in the inventory and equipment escrow accounts which was offset by an
overall decrease in accounts payable and accrued wages. For the six months ended
June 30, 2001, the net cash required for operations was due primarily to the
amount and timing of the funds received from Pharmacia for reimbursable research
and development costs, the gain recorded on the sale of the API manufacturing
equipment to Pharmacia and the increase in receivables associated with the
escrow accounts with Pharmacia, which was offset by an increase in stock awards
issued.
For the six months ended June 30, 2002 and June 30, 2001, net cash provided
by investing activities was $1.6 million and $12.0 million, respectively. The
net cash provided by financing activities for both periods was primarily related
to the proceeds from the net sales and purchases of marketable securities. In
addition, for the period ended June 30, 2001 net cash provided by investing
activities also related to Pharmacia's purchase of our API manufacturing
equipment.
For the six month periods ended June 30, 2002 and June 30, 2001, net cash
required for financing activities was $155,000 and $197,000, respectively. The
net cash required for financing activities in 2002 and 2001 related to loans
provided to executive officers of the Company.
We will need substantial additional resources to develop our products. The
timing and magnitude of our future capital requirements will depend on many
factors, including:
* Our ability to implement an additional effective cost restructuring
program to reduce our use of cash;
* Our ability to establish additional collaborations;
* The viability of SnET2 for future use;
* Our ability to regain our listing status on Nasdaq;
* Our ability to raise equity financing or use stock awards for employee
and consultant compensation;
* The pace of scientific progress and the magnitude of our research and
development programs;
* The scope and results of preclinical studies and clinical trials;
* The time and costs involved in obtaining regulatory approvals;
* The costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
* The costs involved in any potential litigation;
* Competing technological and market developments; and
* Our dependence on others for development and commercialization of our
potential products.
We implemented a cost restructuring program in January 2002 and have
incurred employee attrition throughout 2002 which has allowed us to reduce our
overall use of cash from operations currently and in future periods. Based on
our current cash and investment balances we anticipate that we only have
sufficient cash to fund our operations through September 30, 2002. Executive
management is currently in discussions with one of our significant investors for
some bridge loan financing to extend our cash resources through December 31,
2002. In addition, executive management also believes we can raise additional
funding to support operations through corporate collaborations or partnerships,
licensing of SnET2 or new products and equity financings prior to September 30,
2002. However, there can be no assurance that we will be successful in obtaining
such financing or that financing will available on favorable terms. If
additional funding is not available when required, management will begin
implementing additional cost restructuring programs by the further delay or
reduction in scope of one or more of its research and development programs and
further adjusting, deferring or reducing salaries of employees and by reducing
operating and overhead expenditures to conserve cash to be used in operations.
For this reason our independent auditors have indicated that there is
substantial doubt about our ability to continue as a going concern. Our ability
to raise funds has become more difficult as our stock has been delisted from
trading on the Nasdaq National Market. Any inability to obtain additional
financing would adversely affect our business and could cause us to
significantly reduce or cease operations. Our ability to generate substantial
additional funding to continue our research and development activities,
preclinical studies and clinical trials and manufacturing, and administrative
activities and to pursue any additional investment opportunities is subject to a
number of risks and uncertainties and will depend on numerous factors including:
* The future development decisions related to the ongoing analysis of
the data from our Phase III AMD clinical trials;
* The future development and results of our Phase II dermatology
clinical trial and our ongoing cardiovascular and oncology preclinical
studies;
* The potential future use of SnET2 for ophthalmology or other disease
indications;
* Our ability to successfully raise funds in the future through public
or private equity or debt financings, or establish collaborative
arrangements or raise funds from other sources;
* The extent to which our obligation to pay Pharmacia a portion of the
funds received in our financing activities will hinder our fundraising
efforts;
* Our requirement to allocate certain percentages of net proceeds from
any public or private equity financings and/or asset dispositions, as
defined earlier, towards the early repayment of our debt of $10.0
million plus accrued interest due to Pharmacia under the Contract
Modification and Termination Agreement;
* The potential for equity investments, collaborative arrangements,
license agreements or development or other funding programs that are
at terms acceptable to us, in exchange for manufacturing, marketing,
distribution or other rights to products developed by us;
* The amount of funds received from outstanding warrant and stock option
exercises, if any;
* Our ability to maintain, renegotiate, or terminate our existing
collaborative arrangements;
* Our ability to receive any funds from the sale of our 33% equity
investment in Ramus, consisting of 2,000,000 shares of Ramus Preferred
Stock and 59,112 shares of Ramus Common Stock, neither of which are
publicly traded and the fair market value of which is currently
negligible;
* Our ability to liquidate our equity investment in Xillix, of 2,691,904
shares of Xillix Common Stock, which is publicly traded on the Toronto
Stock Exchange under the symbol (XLX.TO), but has historically had
very small trading volume; and
* Our ability to collect the loan and accrued interest provided to Ramus
under their credit agreement with us.
We cannot guarantee that additional funding will be available to us now,
when needed, or if at all. If additional funding is not available in the near
term, we will be required to scale back our research and development programs,
preclinical studies and clinical trials and administrative activities or cease
operations. As a result, we would not be able to successfully develop our drug
candidates or commercialize our products and we would never achieve
profitability.
RISK FACTORS
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following section of this report describes material risks and
uncertainties relating to our company and its business. Our business operations
may be impaired by additional risks and uncertainties that we are not aware of
or that we currently consider immaterial. Our business, results of operations or
cash flows may be adversely affected if any of the following risks actually
occur. In such case, the trading price of our Common Stock could decline.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS NOT EXPECTED TO BE PROFITABLE FOR THE FORESEEABLE FUTURE AND WE
WILL NEED ADDITIONAL FUNDS TO CONTINUE OUR OPERATIONS PAST SEPTEMBER 2002. IF WE
FAIL TO OBTAIN ADDITIONAL FUNDING, WE COULD BE FORCED TO SCALE BACK OR CEASE
OPERATIONS.
Since our inception we have incurred losses totaling $182.0 million as of
June 30, 2002 and have never generated enough funds through our operations to
support our business. Although we have implemented a cost restructuring program
in January 2002 that will allow us to reduce our overall use of cash from
operations in future periods, we currently anticipate that we only have
sufficient cash to fund our operations through September 30, 2002. Our
independent auditors, Ernst & Young LLP, have indicated in their report
accompanying our year end consolidated financial statements that, based on
generally accepted accounting principles, our viability as a going concern is in
question. We will need substantial additional resources in the near term to
continue to develop our products. If we do not receive sufficient funding by the
end of September 2002 we may be forced to cease operations. The timing and
magnitude of our future capital requirements will depend on many factors,
including:
* Our ability to implement an additional effective cost restructuring
program to reduce our use of cash;
* Our ability to establish additional collaborations;
* The viability of SnET2 for future use;
* Our ability to regain our listing status on Nasdaq;
* Our ability to raise equity financing or use stock awards for employee
and consultant compensation;
* The pace of scientific progress and the magnitude of our research and
development programs;
* The scope and results of preclinical studies and clinical trials;
* The time and costs involved in obtaining regulatory approvals;
* The costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
* The costs involved in any potential litigation;
* Competing technological and market developments; and
* Our dependence on others for development and commercialization of our
potential products.
We plan to actively seek additional capital needed to fund our operations
through corporate collaborations or partnerships, through licensing of SnET2 or
new products and through public or private equity or debt financings. No
commitments for such collaborations or funding are currently in place. Any
inability to obtain additional financing would adversely affect our business and
could cause us to significantly scale back or cease operations. If we are
successful in obtaining additional equity financing it may result in significant
dilution to our stockholders. In addition, any new securities issued may have
rights, preferences or privileges senior to those securities held by our current
stockholders.
IF BAUSCH & LOMB ELECTS NOT TO SIGN A LICENSE AGREEMENT FOR SNET2, WE MAY BE
UNABLE TO CONTINUE OPERATIONS AND ADVANCE OUR DEVELOPMENT PROGRAMS.
In June 2002, we entered into a non-binding letter of intent with Bausch &
Lomb for SnET2 for the treatment of AMD. We will jointly review the SnET2 Phase
III AMD clinical data package, and Bausch & Lomb will have the option to
negotiate the exclusive worldwide license to develop and commercialize the drug
in ophthalmology. Prior to signing the letter of intent, Bausch & Lomb reviewed
top line and certain subset analyses of the clinical data. The license option,
if exercised, is subject to further negotiations, which may include license
fees, milestone payments, royalties and research, development and
commercialization expenses. Bausch & Lomb's review of the top line and subset
clinical data is currently ongoing and we expect the conclusion of this review
by September 2002. There are no guarantees that Bausch & Lomb will enter into a
license agreement for SnET2 or provide us with the funding needed to continue
operations and advance our disease program pipeline.
IF THE DATA FROM OUR COMPLETED PHASE III AMD CLINICAL TRIALS DO NOT PRESENT ANY
PROSPECT OF FUTURE DEVELOPMENT FOR SNET2, THEN WE MAY BE UNABLE TO SUCCESSFULLY
ESTABLISH A NEW COLLABORATIVE PARTNERSHIP, WHICH COULD MATERIALLY HARM OUR
DEVELOPMENT PROGRAMS.
In collaboration with Pharmacia, in December 2001, we completed two Phase
III ophthalmology clinical trials for the treatment of age-related macular
degeneration, or AMD, with our lead drug candidate, SnET2. In January 2002,
Pharmacia, after an analysis of the Phase III AMD clinical data, determined that
the clinical data results indicated that SnET2 did not meet the primary efficacy
endpoint in the study population, as defined by the clinical trial protocol, and
that they would not be filing a New Drug Application, or NDA, with the Food and
Drug Administration, or FDA. Based on Pharmacia's analysis of the AMD clinical
data, we may not be able to proceed with our plans to seek regulatory approval
of SnET2 as formerly planned. In March 2002, we regained the license rights to
SnET2 as well as the related data and assets from the Phase III AMD clinical
trials from Pharmacia. We are currently conducting our own detailed analysis of
the clinical data, including an analysis of the subset groups and based on the
results of our analysis, we will determine the future potential development of
SnET2, including the potential use of SnET2 in other disease indications. In
addition, we have terminated our license collaboration with Pharmacia, and we
intend to seek a new collaborative partner for PhotoPoint PDT in ophthalmology.
If we cease development efforts for SnET2 it could adversely affect our funding
and development efforts for our other programs and severely harm our business.
UNDER OUR CONTRACT MODIFICATION AND TERMINATION AGREEMENT WITH PHARMACIA IN
MARCH 2002, OUR OUTSTANDING DEBT TO PHARMACIA OF $10.0 MILLION PLUS ACCRUED
INTEREST REMAINS SECURED BY ALL OF OUR ASSETS AND THE LOAN REPAYMENT PROVISIONS
MAY PRECLUDE US FROM OBTAINING ADDITIONAL FUNDING. IF WE BECOME UNABLE TO REPAY
OUR BORROWINGS OR VIOLATE THE COVENANTS UNDER THIS AGREEMENT, PHARMACIA COULD
FORECLOSE ON OUR ASSETS.
In connection with the termination of our license collaboration with
Pharmacia, we entered into a Contract Modification and Termination Agreement on
March 5, 2002. Under the Contract Modification and Termination Agreement our
outstanding debt to Pharmacia of approximately $26.8 million was reduced to
$10.0 million plus accrued interest. We will be required to make a payment of
$5.0 million plus accrued interest on each of March 4, 2003 and June 4, 2004.
Interest on the debt will be recorded at the prime rate, which was 4.75% at
March 5, 2002. The outstanding debt to Pharmacia is secured by all of our
assets. Our ability to comply with all covenants and to make scheduled payments,
apply early repayments as required or to refinance our debt obligations will
depend on our financial and operating performance, which in turn will be subject
to prevailing economic conditions and certain financial, business and other
factors, including factors that are beyond our control. If our cash flow and
capital resources become insufficient to fund our debt service obligations or we
otherwise default under the Contract Modification and Termination Agreement,
Pharmacia could accelerate the debt and foreclose on our assets. As a result, we
could be forced to obtain additional financing at very unfavorable terms or
significantly reduce or cease operations.
Additionally, under the Contract Modification and Termination Agreement we
are obligated to pay a portion of net proceeds from any public or private equity
financings and/or asset dispositions towards the repayment of the $10.0 million
plus accrued interest due to Pharmacia as follows:
* If our aggregate net equity financing and/or assets disposition
proceeds are less than or equal to $7.0 million, we are not required
to make an early repayment towards our Pharmacia debt;
* If our aggregate net equity financing and/or assets disposition
proceeds are greater than $7.0 million but less than or equal to $15.0
million, then we are required to apply one-third of the net proceeds
from the amount in excess of $7.0 million up to $15.0 million, or a
maximum repayment of $2.7 million towards our Pharmacia debt;
* If our aggregate net equity financing and/or assets disposition
proceeds are greater than $15.0 million but less than or equal to
$25.0 million, then we are required to apply one-half of the net
proceeds from the amount in excess of $15.0 million up to $25.0
million, or a maximum repayment of $7.7 million towards our Pharmacia
debt;
* If our aggregate net equity financing and/or assets disposition
proceeds are greater than $25.0 million, then we are required to apply
all of the net proceeds from the amount in excess of $25.0 million, or
repay the entire $10.0 million plus accrued interest towards our
Pharmacia debt; and
* Any early repayment of our Pharmacia debt applies first to the loan
amount due on March 4, 2003, then to the remaining loan amount due on
June 4, 2004.
We will need a substantial amount of funding to further our programs and
investors may be reluctant to invest in our equity securities if the funds
necessary to grow our business are instead used to pay down our existing debt
obligations. Investors may also be reluctant to provide us funds for fear that
Pharmacia may foreclose on our assets.
WE WERE DELISTED FROM NASDAQ, WHICH MAY DECREASE THE LIQUIDITY OF OUR STOCK AND
HAS LIMITED OR IMPAIRED OUR ABILITY TO RAISE ADDITIONAL CAPITAL.
On July 12, 2002 our common stock ceased trading on Nasdaq due to our
inability to satisfy the Nasdaq continued listing requirements concerning the
size of our market capitalization and the minimum bid price of our stock. We
were notified on July 12, 2002 that our common stock would begin trading on the
over-the-counter, or OTC, bulletin board, or OTCBB, effective as of the opening
of business on July 12, 2002. The OTCBB is a regulated quotation service that
displays real-time quotes, last-sale prices and volume information in OTC equity
securities. OTCBB securities are traded by a community of market makers that
enter quotes and trade reports. Our delisting could reduce the ability of our
stockholders to purchase or sell shares as quickly and as inexpensively as they
have done historically. For instance, failure to obtain listing on another
market or exchange may make it more difficult for traders to sell our
securities. Broker-dealers may be less willing or able to sell or make a market
in our common stock. Not maintaining a listing on a major stock market may:
* Result in a decrease in the trading price of our common stock;
* Lessen interest by institutions and individuals in investing in our
common stock;
* Make it more difficult to obtain analyst coverage; and
* Make it more difficult for us to raise capital in the future.
OUR FINANCIAL CONDITION AND COST REDUCTION EFFORTS COULD RESULT IN DECREASED
EMPLOYEE MORALE AND LOSS OF EMPLOYEES AND CONSULTANTS CRITICAL TO OUR SUCCESS.
Our success in the future will depend in large part on our ability to
attract and retain highly qualified scientific, management and other personnel
and to develop and maintain relationships with leading research institutions and
consultants. We are highly dependent upon principal members of our management,
key employees, scientific staff and consultants, which we may retain from time
to time. We currently have limited cash and capital resources and the efficacy
of our primary drug development candidate is questionable causing our business
outlook to be uncertain. In January 2002, we implemented measures to reduce our
expenses to provide us more flexibility. These actions, which included
temporarily reducing our employees salaries by approximately 20% until April 5,
2002, voluntary severence packages for a limited time and subsequent layoffs and
employee attrition, have reduced our payroll costs since the beginning of the
year by approximately 40%. Additionally, due to our ongoing limited cash
balances, we try to utilize stock options and stock awards as a key component of
short-term and long-term compensation. However, given that our current stock
options outstanding are significantly de-valued, the current value of our stock
is low and the uncertainty of our long-term prospects, our ability to use stock
options and stock awards as compensation may be limited. These measures, along
with our financial condition and unfavorable clinical data results from the
Phase III AMD clinical trials, may cause employees to question our long-term
viability and increase our turnover. These factors may also result in reduced
productivity and a decrease in employee morale causing our business to suffer.
We do not have insurance providing us with benefits in the event of the loss of
key personnel. Our consultants may be affiliated with or employed by others, and
some have consulting or other advisory arrangements with other entities that may
conflict or compete with their obligations to us.
IF WE ARE NOT ABLE TO MAINTAIN AND SUCCESSFULLY ESTABLISH NEW COLLABORATIVE AND
LICENSING ARRANGEMENTS WITH OTHERS, OUR BUSINESS WILL BE HARMED.
Our business model is based on establishing collaborative relationships
with other parties both to license compounds upon which our products and
technologies are based and to manufacture, market and sell our products. As a
development company we must have access to compounds and technologies to license
for further development. For example, we are party to a license agreement with
the University of Toledo, the Medical College of Ohio and St. Vincent Medical
Center, of Toledo, Ohio, collectively referred to as Toledo, to license or
sublicense certain photoselective compounds, including SnET2. Similarly, we must
also establish relationships with suppliers and manufacturers to build our
medical devices and to manufacture our compounds. We have partnered with Iridex
for the manufacture of certain light sources and have entered into an agreement
with Fresenius for supply of the final dose formulation of SnET2. Due to the
expense of the drug approval process it is critical for us to have relationships
with established pharmaceutical companies to offset some of our development
costs in exchange for a combination of manufacturing, marketing and distribution
rights. We formerly had a significant relationship with Pharmacia for the
development of SnET2 for the treatment of AMD. To further develop SnET2 it is
essential that we establish a new collaborative relationship with another party.
We are currently at various stages of discussions with various companies
regarding the establishment of new collaborations. If we are not successful in
establishing new collaborative partners for the potential development of SnET2
or our other molecules, we may not be able to pursue further development of such
drugs and/or may have to reduce or cease our current development programs, which
would materially harm our business. Even if we are successful in establishing
new collaborations, they are subject to numerous risks and uncertainties
including the following:
* Our ability to negotiate acceptable collaborative arrangements,
including those based upon existing letter agreements;
* Future or existing collaborative arrangements may not be successful or
may not result in products that are marketed or sold;
* Collaborative partners are free to pursue alternative technologies or
products either on their own or with others, including our
competitors, for the diseases targeted by our programs and products;
* Our partners may fail to fulfill their contractual obligations or
terminate the relationships described above, and we may be required to
seek other partners, or expend substantial resources to pursue these
activities independently. These efforts may not be successful; and
* Our ability to manage, interact and coordinate our timelines and
objectives with our strategic partners may not be successful.
ALL OF OUR PRODUCTS, EXCEPT SNET2 AND MV9411, ARE IN AN EARLY STAGE OF
DEVELOPMENT AND ALL OF OUR PRODUCTS, INCLUDING SNET2 AND MV9411, MAY NEVER BE
SUCCESSFULLY COMMERCIALIZED.
Our products, except SnET2 and MV9411, are at an early stage of development
and our ability to successfully commercialize these products, including SnET2
and MV9411, is dependent upon:
* Successfully completing our research or product development efforts or
those of our collaborative partners;
* Successfully transforming our drugs or devices currently under
development into marketable products;
* Obtaining the required regulatory approvals;
* Manufacturing our products at an acceptable cost and with appropriate
quality;
* Favorable acceptance of any products marketed; and
* Successful marketing and sales efforts of our corporate partner(s).
We may not be successful in achieving any of the above, and if we are not
successful, our business, financial condition and operating results would be
adversely affected. The time frame necessary to achieve these goals for any
individual product is long and uncertain. Most of our products currently under
development will require significant additional research and development and
preclinical studies and clinical trials, and all will require regulatory
approval prior to commercialization. The likelihood of our success must be
considered in light of these and other problems, expenses, difficulties,
complications and delays.
OUR PRODUCTS, INCLUDING SNET2 AND MV9411, MAY NOT SUCCESSFULLY COMPLETE THE
CLINICAL TRIAL PROCESS AND WE MAY BE UNABLE TO PROVE THAT OUR PRODUCTS ARE SAFE
AND EFFICACIOUS.
All of our drug and device products currently under development will
require extensive preclinical studies and/or clinical trials prior to regulatory
approval for commercial use, which is a lengthy and expensive process. None of
our products, except SnET2, have completed testing for efficacy or safety in
humans. Some of the risks and uncertainties related to safety and efficacy
testing and the completion of preclinical studies and clinical trials include:
* Our ability to demonstrate to the FDA that our products are safe and
efficacious;
* Our products may not be as efficacious as our competitors products;
* Our ability to successfully complete the testing for any of our
compounds within any specified time period, if at all;
* Clinical outcomes reported may change as a result of the continuing
evaluation of patients;
* Data obtained from preclinical studies and clinical trials are subject
to varying interpretations which can delay, limit or prevent approval
by the FDA or other regulatory authorities;
* Problems in research and development, preclinical studies or clinical
trials that will cause us to delay, suspend or cancel clinical trials;
and
* As a result of changing economic considerations, competitive or new
technological developments, market approvals or changes, clinical or
regulatory conditions, or clinical trial results, our focus may shift
to other indications, or we may determine not to further pursue one or
more of the indications currently being pursued.
Data already obtained from preclinical studies and clinical trials of our
products under development do not necessarily predict the results that will be
obtained from future preclinical studies and clinical trials. A number of
companies in the pharmaceutical industry, including biotechnology companies like
us, have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials.
In collaboration with Pharmacia, in December 2001, we completed two Phase
III ophthalmology clinical trials for the treatment of AMD with our lead drug
candidate, SnET2. In January 2002, Pharmacia, after an analysis of the Phase III
AMD clinical data, determined that the clinical data results indicated that
SnET2 did not meet the primary efficacy endpoint in the study population, as
defined by the clinical trial protocol, and that they would not be filing an NDA
with the FDA. Based on Pharmacia's analysis of the AMD clinical data, we may not
be able to proceed with our plans to seek regulatory approval of SnET2 as
formerly planned. In March 2002, we regained the license rights to SnET2 as well
as the related data and assets from the Phase III AMD clinical trials from
Pharmacia. We are currently conducting our own detailed analysis of the clinical
data, including an analysis of the subset groups and, based on the results of
our analysis, we will determine the future potential development of SnET2,
including the potential use of SnET2 in other disease indications. In addition,
we have terminated our license collaboration with Pharmacia, and we intend to
seek a new collaborative partner for PhotoPoint PDT in ophthalmology.
Our clinical trials may not demonstrate the sufficient levels of safety and
efficacy necessary to obtain the requisite regulatory approval or may not result
in marketable products. The failure to adequately demonstrate the safety and
effectiveness of a product under development could delay or prevent regulatory
approval of the potential product and would materially harm our business.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
From time to time and in particular during the last couple of months, the
price of our Common Stock has been highly volatile. These fluctuations create a
greater risk of capital losses for our stockholders as compared to less volatile
stocks. From June 30, 2001 to June 30, 2002, our Common Stock price, per Nasdaq
closing prices, has ranged from a high of $11.83 to a low of $0.53.
The market prices for our Common Stock, and the securities of emerging
pharmaceutical and medical device companies, have historically been highly
volatile and subject to extreme price fluctuations, which may reduce the market
price of the Common Stock. Extreme price fluctuations could be the result of the
following:
* Future development decisions related to the results of our Phase III
AMD clinical trials;
* Announcements concerning Miravant or our collaborators, competitors or
industry;
* Our ability to successfully establish new collaborations;
* The results of our testing, technological innovations or new
commercial products;
* The results of preclinical studies and clinical trials by us or our
competitors;
* Technological innovations or new therapeutic products;
* Our ability to regain our listing status on Nasdaq;
* Litigation;
* Public concern as to the safety, efficacy or marketability of products
developed by us or others;
* Comments by securities analysts;
* The achievement of or failure to achieve certain milestones; and
* Governmental regulations, rules and orders, or developments concerning
safety of our products.
In addition, the stock market has experienced extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities of many emerging pharmaceutical and medical device companies for
reasons frequently unrelated or disproportionate to the performance of the
specific companies. If these broad market fluctuations cause the trading price
of our Common Stock to significantly decline, we may be unable to obtain
additional capital that we may need through public or private financing
activities and our stock could be delisted from Nasdaq further exacerbating our
ability to raise funds and limiting your ability to sell your shares. Because
outside financing is critical to our future success, large fluctuations in our
share price that harm our financing activities could cause us to significantly
alter our business plans or cease operations altogether.
WE RELY ON THIRD PARTIES TO CONDUCT CLINICAL TRIALS ON OUR PRODUCTS, AND IF
THESE RESOURCES FAIL, OUR ABILITY TO SUCCESSFULLY COMPLETE CLINICAL TRIALS WILL
BE ADVERSELY AFFECTED AND OUR BUSINESS WILL SUFFER.
To date, we have limited experience in conducting clinical trials. We had
relied on Pharmacia, our former corporate partner, and Inveresk, Inc., formerly
ClinTrials Research, Inc., a contract research organization, for our Phase III
AMD clinical trials and we rely on a contract research organization for our
Phase II dermatology clinical trials. We will either need to rely on third
parties, including our collaborative partners, to design and conduct any
required clinical trials or expend resources to hire additional personnel or
engage outside consultants or contract research organizations to administer
current and future clinical trials. We may not be able to find appropriate third
parties to design and conduct clinical trials or we may not have the resources
to administer clinical trials in-house. The failure to have adequate resources
for conducting and managing clinical trials will have a negative impact on our
ability to develop marketable products and would harm our business. Other
contract research organizations may be available in the event that our current
contract research organizations fail; however there is no guarantee that we
would be able to engage another organization in a timely manner, if at all. This
could cause delays in our clinical trials and our development programs, which
could materially harm our business.
WE RELY ON PATIENT ENROLLMENT TO CONDUCT CLINICAL TRIALS, AND OUR INABILITY TO
CONTINUE TO ATTRACT PATIENTS TO PARTICIPATE WILL HAVE A NEGATIVE IMPACT ON OUR
CLINICAL TRIAL RESULTS.
Our ability to complete clinical trials is dependent upon the rate of
patient enrollment. Patient enrollment is a function of many factors including:
* The nature of our clinical trial protocols;
* Existence of competing protocols or treatments;
* Size and longevity of the target patient population;
* Proximity of patients to clinical sites; and
* Eligibility criteria for the clinical trials.
A specific concern for potential future AMD clinical trials is that there
currently is an approved treatment for AMD and patients enrolled in future AMD
clinical trials, if any, may choose to drop out of the trial or pursue
alternative treatments. This could result in delays or incomplete clinical trial
data.
We cannot assure that we will obtain or maintain adequate levels of patient
enrollment in current or future clinical trials. Delays in planned patient
enrollment may result in increased costs, delays or termination of clinical
trials, which could result in slower introduction of our potential products, a
reduction in our revenues and may prevent us from becoming profitable. In
addition, the FDA may suspend clinical trials at any time if, among other
reasons, it concludes that patients participating in such trials are being
exposed to unacceptable health risks. Failure to obtain and keep patients in our
clinical trials will delay or completely impede test results which will
negatively impact the development of our products and prevent us from becoming
profitable.
WE MAY FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS,
OUR PATENTS AND OUR PROPRIETARY TECHNOLOGY, WHICH WILL MAKE IT EASIER FOR OTHERS
TO MISAPPROPRIATE OUR TECHNOLOGY AND INHIBIT OUR ABILITY TO BE COMPETITIVE.
Our success will depend, in part, on our and our licensors' ability to
obtain, assert and defend our patents, protect trade secrets and operate without
infringing the proprietary rights of others. The exclusive license relating to
various drug compounds, including our leading drug candidate SnET2, may become
non-exclusive if we fail to satisfy certain development and commercialization
objectives. The termination or restriction of our rights under this or other
licenses for any reason would likely reduce our future income, increase our
costs and limit our ability to develop additional products. Although we believe
we should be able to achieve such objectives, we may not be successful.
The patent position of pharmaceutical and medical device firms generally is
highly uncertain. Some of the risks and uncertainties include:
* The patent applications owned by or licensed to us may not result in
issued patents;
* Our issued patents may not provide us with proprietary protection or
competitive advantages;
* Our issued patents may be infringed upon or designed around by others;
* Our issued patents may be challenged by others and held to be invalid
or unenforceable;
* The patents of others may prohibit us from developing our products as
planned; and
* Significant time and funds may be necessary to defend our patents.
We are aware that our competitors and others have been issued patents
relating to photodynamic therapy. In addition, our competitors and others may
have been issued patents or filed patent applications relating to other
potentially competitive products of which we are not aware. Further, our
competitors and others may in the future file applications for, or otherwise
obtain proprietary rights to, such products. These existing or future patents,
applications or rights may conflict with our or our licensors' patents or
applications. Such conflicts could result in a rejection of our or our
licensors' applications or the invalidation of the patents.
Further exposure could arise from the following risks and uncertainties:
* We do not have contractual indemnification rights against the
licensors of the various drug patents;
* We may be required to obtain licenses under dominating or conflicting
patents or other proprietary rights of others;
* Such licenses may not be made available on terms acceptable to us, if
at all; and
* If we do not obtain such licenses, we could encounter delays or could
find that the development, manufacture or sale of products requiring
such licenses is foreclosed.
We also seek to protect our proprietary technology and processes in part by
confidentiality agreements with our collaborative partners, employees and
consultants. These agreements could be breached and we may not have adequate
remedies for any breach.
The occurrence of any of these events described above could harm our
competitive position. If such conflicts occur, or if we believe that such
products may infringe on our proprietary rights, we may pursue litigation or
other proceedings, or may be required to defend against such litigation. We may
not be successful in any such proceeding. Litigation and other proceedings are
expensive and time consuming, regardless of whether we prevail. This can result
in the diversion of substantial financial, managerial and other resources from
other activities. An adverse outcome could subject us to significant liabilities
to third parties or require us to cease any related research and development
activities or product sales.
WE HAVE LIMITED MANUFACTURING AND MARKETING CAPABILITY AND EXPERIENCE AND THUS
RELY HEAVILY UPON THIRD PARTIES.
Prior to our being able to supply drugs for commercial use, our
manufacturing facilities must comply with Good Manufacturing Practices, or GMPs.
In addition, if we elect to outsource manufacturing to third-party
manufacturers, these facilities also have to satisfy GMP and FDA manufacturing
requirements. To be successful, our products must be manufactured in commercial
quantities under current GMPs and must be at acceptable costs. Although we
intend to manufacture drugs and devices at some commercial levels, we have not
yet manufactured any products under GMPs which can be released for commercial
use, and we have limited experience in manufacturing in commercial quantities.
We are licensed by the State of California to manufacture SnET2 bulk active
pharmaceutical ingredient, or bulk API, at our Santa Barbara, California
facility for clinical trial and other use. We currently manufacture the bulk
API, the process up to the final formulation and packaging step, and have the
ability to manufacture light producing devices and light delivery devices, and
conduct other production and testing activities, at this location. However, we
have limited capabilities, personnel and experience in the manufacture of
finished drug product, light producing and light delivery devices and utilize
outside suppliers, contracted or otherwise, for certain materials and services
related to our manufacturing activities. We currently have the capacity, in
conjunction with our manufacturing suppliers Fresenius and Iridex, to
manufacture products at certain commercial levels and we believe we will be able
to do so under GMPs with subsequent FDA approval. If we receive an FDA or other
regulatory approval, we may need to expand our manufacturing capabilities and/or
depend on our collaborators, licensees or contract manufacturers for the
expanded commercial manufacture of our products. If we expand our manufacturing
capabilities, we will need to expend substantial funds, hire and retain
significant additional personnel and comply with extensive regulations. We may
not be able to expand successfully or we may be unable to manufacture products
in increased commercial quantities for sale at competitive prices. Further, we
may not be able to enter into future manufacturing arrangements with
collaborators, licensees, or contract manufacturers on acceptable terms or at
all. If we are not able to expand our manufacturing capabilities or enter into
additional commercial manufacturing agreements, our commercial product sales, as
well as our overall business growth could be limited, which in turn could
prevent us from becoming profitable or viable as a business. Fresenius is the
sole manufacturer of the final dose formulation of SnET2 and Iridex is currently
the sole supplier of the light producing devices used in our AMD clinical
trials. Both currently have commercial quantity capabilities. At this time, we
have no readily available back-up manufacturers to produce the final formulation
of SnET2 at commercial levels or back-up suppliers of the light producing
devices. If Fresenius could no longer manufacture for us or Iridex was unable to
supply us with devices, we could experience significant delays in production or
may be unable to find a suitable replacement, which would reduce our revenues
and harm our ability to commercialize our products and become profitable.
We have no direct experience in marketing, distributing and selling our
pharmaceutical or medical device products. We will need to develop a sales force
or rely on our collaborators or licensees or make arrangements with others to
provide for the marketing, distribution and sale of our